News & Insights

Key Takeaways

• August payrolls rebounded, with 162,000 jobs added and unemployment holding at 4.1%, but a shrinking labor force and uneven participation mask a divided labor market.
• Although first-time unemployment claims remain at a 57-year low and employed workers enjoy relatively high job security, unemployed and younger workers face a growing entry-level opportunity deficit in this “low hire, low fire” environment, with long-term unemployment near a four-year high.
• Near-term weakness in productivity growth may reflect the current AI implementation cycle and measurement lags rather than fundamental stalling. Moderating unit labor costs, falling token prices and wider adoption of frontier and open-source models point to potential gains ahead.

August Jobs Report Reverses Weak Growth Trend

The August employment data painted a much-improved picture of the labor market compared with the initial reports of the previous two months. Nonfarm payrolls rose by 162,000, far exceeding the consensus expectations of 55,000, with the previous two months seeing strong upward revisions. Goods-producing jobs have been trending upward, reaching the highest level of growth in over two years, supported by strong capital investment.

The unemployment rate remained steady at 4.1% after improving throughout the year. Underlying the unchanged unemployment rate, there was a large 569,000 increase in jobs in the household survey, offset by the first improvement in the labor force participation rate in a year. After plunging in July, the participation among younger workers mostly reversed, possibly reflecting problems with seasonal adjustments by the Bureau of Labor Statistics. Because younger workers disproportionately seek positions in retail and hospitality, sectors where job-opening growth has contracted the most in recent months, fewer openings can create a mismatch between labor supply and demand.

The underlying dynamic is that employed workers enjoy higher job security while unemployed people and those not yet in the workforce are having difficulty getting jobs in a “low hire, low fire" market. Businesses are retaining existing employees longer while replacing fewer departing workers, slowing the turnover that typically creates entry-level job openings.

The downsides are increasingly stark, with the percentage of unemployed people who have been out of work for more than 27 weeks near a four-year high. It’s actually a 10-year high if you exclude the pandemic. More notably, the measure had never reached this level before 2009. The picture is much brighter for those with jobs: First-time unemployment claims recently hit a 57-year low, one of the most reliable signals that the labor market remains grounded.

However, the annual benchmark revision to the BLS payroll survey reflects a very different outcome. Preliminary estimates indicate that actual payroll growth through March 2026 is 79,000 lower than what was previously reported. A declining labor force, driven by an aging population and a smaller young generation, means the level of job growth to maintain full employment will be much lower than we’ve seen throughout history.

Unemployment Rate Declining

Source: Bloomberg

Percentage of Unemployed for 27 Weeks or More

Source: Bloomberg

Waiting for the Productivity Gains as the J-Curve Dynamics Develop

A shrinking labor force is creating economic headwinds and making productivity growth more essential to continued economic expansion. Second-quarter productivity growth was 1.4% quarter over quarter annualized, marking a third consecutive quarter of weak sequential growth. Year-over-year growth remained a respectable 2.2%. Unit labor costs continued to moderate, offering a glimmer of hope that inflation may improve, particularly within services.

Given the scale of recent AI investment and broader business spending, these lagging productivity reports raise a central question: Are returns simply taking time to emerge, or are current measurement tools failing to capture the business process improvements of these new technologies? History shows that disruptive technologies often produce a lag between investment and productivity gains, a phenomenon known as the productivity J-curve. During the initial adoption phase, firms must reorganize workflows, retrain staff and redesign software systems, creating costs that can weigh on productivity even as investment expands. Once implementation is complete and systems optimize, productivity gains typically accelerate sharply.

Additionally, some productivity improvements are not captured in initial official statistics, only to appear in revisions months or years later. This has been evident during past periods of technological change, suggesting that productivity performance may meaningfully exceed currently reported figures.

Other data points suggest the productivity picture is more encouraging beneath the surface. Capital goods orders excluding defense and aircraft are expanding at unusually robust rates, a strong productivity leading indicator. Companies building capacity ahead of demand typically achieve significant productivity gains when that capacity comes online. Overall business investment remains solid, with AI-related spending representing a smaller share of total investment than the prior quarter – indicating that capital is deploying more broadly.

As the technologies become more powerful and demand grows, large language model token prices are falling sharply. Competition across frontier and open-source models is intensifying as users become more sophisticated in selecting the most appropriate tool to complete specific tasks. The rapid adoption of open-source models has lowered costs for many companies and put pressure on frontier model pricing. As computing and token generation becomes cheaper, demand expands and utilization deepens, ultimately generating outsized productivity gains.

Taken together, falling technology costs, substantial infrastructure investment and historical productivity patterns suggest that weak near-term productivity readings may reflect implementation cycles and measurement challenges rather than fundamental weakness.

Productivity Compaired to U.S. Business Output

Source: Oxford Economics, Haver Analytics

Unit Labor Costs Percentage Change QOQ Annualized

Source:Federal Reserve Economic Data

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